“But What Does This Mean?”

This past spring, I taught a personal risk management course at Emory University, and my students brought a whole truckload of questions impacting both non-insurance risk management techniques and the typical insurance policies they each obtained but had never read. Teaching this stuff is simple, as it consists mostly of lists and formulas, but each word in the policy is crucial. When applied to either personal or national disasters, each word, over the entire body of the insured public, has implications that can involve millions of dollars. For example, consider a policy that covers only “direct” loss or damage. What exactly does that mean? How does the adjuster separate the direct from the indirect? That was the subject of my article series earlier this year on business income insurance.

Policies do not always mean what they say. For example, my class discussed personal auto policies, and the phrases “actual cash value” (ACV) and “like kind and quality” used in terms of damage to vehicles, which led to lengthy discussions. If ACV means, as many courts have stated, “the cost to repair, or to replace new less physical depreciation and obsolescence,” then why are total losses settled on the basis of fair market value, often in accordance with citations from the NADA Book? If (as I do) you have a 16-year-old Ford Contour with less than 50,000 miles on it, and the typical car depreciates at a rate of 10,000 to 12,500 miles (10-12.5 percent) per year, then somewhere around 100,000 to 125,000 or less miles the car is shot. At that point, it is a piece of transportation and little else; probably something that will break down on a hot day in the middle of the freeway in rush hour and clog the road for a good 10 miles. However, taking the traditional definition of ACV, my car with less than 50,000 miles, despite being 16 years old, should be worth somewhere around half the value of a new model comparable to a Ford Contour, perhaps less a bit for obsolescence as it lacks power windows. Of course, there is always the issue of like kind and quality. I told the class about how I had once caught the famous news broadcaster, the late Paul Harvey, in a conflict of interest. He had two sponsors one day for his radio show: Allstate and General Motors (GM) Genuine Parts. Allstate, I knew, was an active participant in the I-CAR program, which had much to say about using after-market parts in body repairs to save money, arguing that these parts, usually foreign-manufactured as opposed to used parts from a junk yard, were of “like kind and quality.” I am sure the folks at GM Genuine Parts, however, would have strongly disagreed. Just what does “like kind and quality” mean? More than one court has had its say, and in a few, the conclusion was “diminished value,” now claimable in several states.

Coverage is Key

Regardless of the type of claim, be it property, casualty, life, health, or surety, no adjustment can proceed without a complete understanding of the applicable coverage issues and how those issues have been addressed by the courts or legislatures in the applicable jurisdiction. That cannot be stressed enough. The policy is meant to be read in one particular way, but often the courts or the legislature may change what that wording means. It therefore behooves every claims adjuster, whether employed by an insurance company directly or working independently, to know both the policy language and the law.

The class was told that there are four types of law that have a major impact on insurance. The first, of course, is contract law, with the policy itself being the primary contract. Also keep in mind that other contracts, such as hold harmless agreements, indemnity clauses, and exculpatory notices affect claims. Adjusters must seek out such contractual agreements and determine how they impact any particular claim. Undoubtedly millions of dollars are incorrectly paid annually by adjusters who failed to find a contractual agreement that would either limit the payment, provide a basis for subrogation or contribution, or would have required payment to someone else who was equally ignorant of the contract.

Then there is tort law—the law of negligence. The formula is simple: duty owed, breach of duty, proximate cause, and defenses. Each of those, in turn, implies scores of variation. Is the duty owed one of slight, ordinary or a high degree of care? To what extent did the breach of duty cause the damages? Was the breach the sole cause of damage, or were there contributing, exonerating or mitigating factors? And what is the law in the jurisdiction about contributory or comparative negligence? Is it pure comparative, where both parties may owe each other, or modified, where the negligence of one party is so much greater than the other that the claim is barred? A few states still apply the old common law rule of contributory negligence, but such law is often weakly applied, or left up to a jury to decide.

There was once a case involving bad faith where the adjuster confused coverage with liability. The insured had only minimal limits of liability in a pure comparative negligence jurisdiction. The deceased claimant, who was a young man with a family, was considered to have been at least 50 percent at fault in the vehicular accident. The adjuster decided that if the claimant was 50 percent at fault, then he was entitled to only 50 percent of the coverage limits. One can imagine the joyful expression on the face of the plaintiff's attorney as he explained that mistake to the jury. Comparative negligence applies to the damages, not the coverage; that fatality was worth many times the policy limits, so half of that value would still have been far in excess of the insured's limits.

Something New Every Day

What other kinds of law affect claims and coverage? One is statutory law. That is applicable to many kinds of claims, from workers' compensation to the subrogation rights of the government in Medicaid, Medicare, and Civilian Health and Medical Program of the Uniformed Services (CHAMPUS) claims. There are dog bite statutes, innkeepers laws, and environmental protection statutes, all of which affect how a claim must be handled.

Then there is the law of agency, or respondeat superior, which maintains that the master is responsible for the act of the servant. It also means, for the adjuster, that misery loves company, so go out and find as many co-tortfeasors by agency as possible to contribute to a claim. That requires work: research, probing, and being a general nuisance, as insureds often do not fully reveal, or want to reveal, who else might be involved in the situation. In a personal auto policy, the principal is “an insured” under the coverage, but only to the limits of liability. In a major wreck with expensive injuries and damages, those limits can be eroded quickly. It is amazing how often contributing sources are never located. Nothing in the field of claims is static. Change is constant in statutes, contracts, court decisions, and especially coverage. The ISO is a business, and its business is making changes to policies to make them more accurate. I had told my class about a situation where an insured's water pipe had broken while he was out of town for the weekend. The water spilled into his home the few days he was away, and he came home to find his basement flooded. Then, a few weeks later, he received the water bill—several thousand dollars for all that water. But wasn't the water his “personal property” under the homeowners form? He could not use the water—it was damaged by the leak, a covered peril. So, wouldn't the water bill be part of the damages?

The Final Step: Disposition of Damages

Far too many adjusters complete this step first. Before they have investigated the claim, they may have provided the claimant with a rental car or otherwise assumed that the insurance company will take care of the charges. But does the coverage fully apply? Is the insured 100 percent liable for the damages? How does that issue of ACV affect those damages? Are there statutes that may impact the claim? Next to careless documentation and unclear communication, disorganization of the steps of adjustment is the biggest hazard facing an adjuster.

A claim requires that investigation and evaluation of coverage come first, followed by liability, and then the damages. Negotiations must take place, and a consensus of what is really owed should be applied. Put the cart before the horse, and a mistake will occur.

Public Enemy Number One

People hear what they want to hear, and what is said can be easily misunderstood. With all the smartphone communications going on today on iPhones, BlackBerrys, and other gizmos, there may be little permanent record of what was actually spoken, texted, or tweeted. The adjuster who fails to document all communication in some permanent format that is accessible by both parties (such as an old-fashioned letter where both parties have a copy) will be the “twit” in Twitter. Unclear communication will inevitably lead to the adjuster hearing those three most horrible words: “But you said …”

So, with disasters coming fast and furious upon us, both national and personal, we must be prepared. As adjusters, we must do more than just show up. We have to, in the words of Michael Mescon, former Dean of the Georgia State University College of Business, be dressed and ready to play. Just showing up at the scene of a catastrophe is insufficient. That is largely what happened after Hurricane Katrina, and virtually everyone was upset because neither the insureds nor some of the adjusters were fully prepared and ready to play.